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December 12, 2012

BlackRock’s Fink: 95% of Fiscal Cliff Pundits ‘Have No Clue’

CEO believes ‘we will find a solution’

Larry Fink, CEO of BlackRock.

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Larry Fink is trying his hand as television pundit, and he doesn’t like what he sees.

Fink, CEO of BlackRock, guest hosted on Bloomberg TV's "Market Makers" on Tuesday, and noted that “95% of the people that are talking about [the fiscal cliff] have no clue,” he said, referring to pundits (and just about everyone else). He added, "I think we will find a solution."

Fink is "very bullish" on the United States and "our corporations are in fabulous shape with $1.7 trillion in cash … I don't believe you're going to see that much default risk in the next few years."

Fink on the fiscal cliff:

"I would say that 95% of the people that are talking about it have no clue … I was in Washington for a couple of days last week. I am on the phone a lot. I think we will find a solution. Republicans and Democrats understand the enormity of the issue. I actually believe that the Republicans understand–I would say that the nation's consensus that we have to raise the upper income taxes and I think that what they are trying to do is work on a great bargain, working with the Democrats, and making sure that there is a 3 to 1, 2.5 to 1 in terms of expense savings for revenues. I actually think that the threshold of the Republican side has been determined subject to working out on the Democratic side the expense savings. I do believe that the Republicans will threaten if they can't find those expense savings ...There is still posturing going on."

On whether there's a buying opportunity between now and the end of the year:

"I told all my investors that any time the market had a down shaft, go buy. The market is almost creeping back up to a month high. I think that the market is saying that there will be a solution and those who were able to buy on those downdrafts, those momentary fears, did well. Once again, we spend too much time focusing on those day traders and you have to look for your point in time to be an investor and you like a stock at a certain level, you should stick with those strategies."

On how banks can make big money going forward:

"I am quite bullish on the banking system going forward. I think banks in the United States have done a very good job of retooling its businesses. They have much more to do but their balance sheets are very strong. Much of the problems in U.S. banks are behind them."

On how he feels about BlackRock being bigger than the Street:

"I don't compare us and we are not the Street. This is our clients' money. I believe the thinning of the balance sheets is what regulators wanted. Regulators basically said you will have higher capital charges and we want you to have lower balance sheets so you are not too big to fail. We want you to get into more flow business. I think at this period of time, we as investors are struggling with a lack of liquidity so I am not suggesting these are not difficult times for all investors in the market trading of bonds, specifically, but over time, I think you'll see more products moving to exchanges. The Wall Street firms will do more flow business. This will be evolutionary and unfortunately we are now at this period of time of a real big sea change. We are historically dependent on the balance sheets as a mechanism for inventory and now we will be more dependent on flow business. That will force more business onto exchanges. I actually think this is what regulators want."

On saying in February that investing 100% in stocks is the way to go and whether this holds true today:

"I would speak more cautionary until we see what happens in Washington. If you are a long-term investor and thinking about retirement or your pension plan, you have no other choice but to be in equities. If you are not in equities now, you need to start layering in and starting to buy but I would not do it all at once."

On whether he's surprised that mortgages have had such a great run this year:

"No, when the Federal Reserve buys as much as they do, you are certainly not surprised at the performance of certain items. Operation Twist and QE3 buying all the mortgages really didn't help the mortgage market. At the same time we also started to see stability in housing markets and rising housing prices for the first time and when you put that together, you had a good year. But where is S&P up? Thirteen percent this year. Some of the European stocks dropped over 20% so I am happy with my prognostication and I would live by it going forward."

"I am very bullish on the United States over a cyclical period of time. With that in mind, it is hard for me to see how bonds will continue–at this rate–continue to have that kind of performance. Way too many people are investing in bonds with all the volatility that is embedded in bonds now with their duration … a 30-year Treasury today is at a record low, around 3.5%. Excuse me, 2.5%. If you look at the CBO estimates over a 10-year cycle, the U.S. government says 10-year Treasuries in a number of years will be at 5%. Let's assume the spread between 10 and 30 years is another 100 basis points so they are suggesting that 30 year will be at 6%. With a duration of 16, that means that if the CBO, our government's accounting, is correct, you will lose 45% of your principal in bonds … I think this is the big mistake that people don't understand now. Bonds don't possess that risk-free return in this low rate environment. I am using what our government is projecting out for interest rates. When we talk about budgets, it is the U.S. government's belief that 10-year Treasuries will be of 5% out in another five years."

On whether searching for yields and going for corporates is a mistake:

"As I said, I am bullish on the United States. If you're going to take a risk in bonds, I believe you will have a higher return in corporate bonds. I don't believe you'll see that much default risk in the next few years. Our corporations are in fabulous shape with $1.7 trillion in cash. They are using some of that cash at the moment for special dividends and stock repurchases, so they are not using it in the one best way for bondholders, but if you're going to invest in fixed income you will need higher return assets and that will be in corporates."

On what happens to pension funds that are investing in corporations and high yield:

"The pension issue is bigger than just bonds. In fact, bonds are only a component of all the risks they are sitting with. I visited a couple of large pension plans in the United States last week and they are assuming they will earn 7.5% return."

"If you believe that the world can grow 3% per year–that is lower than we have seen in the last 10 years–if you assume we can grow by 3% per year in world growth and assume you can buy stocks that have a dividend of 3.5%, if there is an improvement in margins, you will see you can make a 7-7.5% return over 10 years in equities. You will have to be a patient investor and not worry about the intraday volatility. This is the reason why I like equities even though everybody is running away."

On whether BlackRock investors have been harmed by LIBOR:

It's too early for me to tell. We are doing a full review of all of the trading activities. We don't know yet. In most cases, we are learning that they artificially lowered the LIBOR rates. That is very harmful for the investors because we had an artificially low rate. I think we are discovering also that there are moments in time–and I think this is where the investigators are really looking into it–where there was some form of malfeasance at a specific day because they had many clients money that was going to be reset and they raised the price. Until you understand how their behavior was or if there was a series of money for the artificially lowered the rates, we as an investor have been harmed. There are other cases where we saw evidence that they possibly raised the rate and those issuers were then harmed. This is not an easy thing to determine. We are doing a full and exhaustive review and many of our clients have asked what we are doing on behalf of them.